Friday, October 1, 2010

Renminbi Revaluation

Officials in the White House are pushing hard to get China to revalue the Renminbi, and congress passed some sort of resolution suggesting a tariff on Chinese goods if China doesn't revalue the currency.

The story, I guess, is that Chinese goods are artificially undervalued and thus unfairly competing with U.S. produced goods. Many economists and other bloggers have pointed out that, if this hurts anyone, it is actually the Chinese since U.S. consumers are able to purchase artificially cheap goods.

But the story goes that if the currency was revalued upwards, then U.S. goods would be more competitive. Unfortunately (and I don't know who else has pointed this out), this assumes facts not in evidence. Specifically, I think the probability is high that goods produced in China are not also produced in the U.S. That means that the revaluation would have to be pronounced and permanent so as to encourage U.S. producers to start manufacturing (say) tennis shoes in the U.S. again. How long would that take, if this happened at all?

Moreover, to the extent that Chinese goods are actually inputs into U.S. goods (say steel), this will raise the costs for U.S. producers, the bulk of which will be passed on to consumers. Those that aren't will cost shareholders.

Now, this kind of interventionism will hurt anyone who buys stuff from China, and help those who don't. Who is being helped by this operation? Anyone who sources from non-Chinese manufacturers.

This is just another intervention to favor one small group of producers at the expense of a large swath of people (consumers and other producers).

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